In today’s article we continue our series on how to get paid with a look what every business owner needs to know about sales tax.
Sales taxes are regulated on the state and local levels, and applied to retail sales to end consumers. While many cities do not have a sales tax, all but 5 states (Alaska, Montana, Delaware, Oregon and New Hampshire) do have a sales tax. Because they are regulated on the state and local level, the scope of products taxed and the exact tax rate will vary depending on the state, city, or county, in which the sale occurs.
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When Does A Company Have To Charge A Sales Tax?
Generally, you only have to tax sales in locations where you have a physical presence. This means you will almost certainly need to register your company with your home state’s sales tax commission (full list of sites by state here) and city if applicable. To find out if your city has a sales tax and if so where to file search Google using the following format “My City + Sales Tax” and “My City + Filing Sales Taxes”.
If you have a physical presence in other states, such as retail locations, warehouses, and travelling salesmen, you may also need to pay sales in there.
Defining “A Physical Location” For Sales Tax Purposes
Establishing a physical presence in another state is known as creating a “nexus”, and it requires you to register with those states’ sales tax commissions as well. Unfortunately each state has their own definition of what a “physical presence” entails, and what goods and services are taxable, so if you have any sort of physical presence in a state (including attending trade shows) then you can check this link for an overview of sales tax requirements for each state.
Internet sales shipped to states/cities where you have not established a nexus will generally be exempt from sales taxes.
Online vs. In-Person Sales Tax
In general, you do not have to pay sales tax for online sales to states in which you have no physical presence of people or property. You do have to collect sales taxes on online sales to your home state, and all states in which you have a physical presence. For example, if your company were based in New York, you would not have to pay sales tax to online orders shipped to California, unless you also have employees or property based in California. You would, however, have to pay sales tax to all online orders shipped within New York.
There is a piece of legislation called the Marketplace Fairness Act of 2013 currently pending in Congress, which would require large online retailers to pay sales taxes. This would only affect business with more than $1 million in annual sales. Sellers with $1 million or less in annual sales would be exempt from this requirement, but would still have to pay sales taxes in states where they have a physical presence.
For a guide to the internet sales tax regulations for your state, visit the 50 state internet sales tax guide here.
Sales Taxes on Vendor Sales
Generally, sales tax only applies to transactions with end consumers. This means that items purchased by other vendors for resale are usually exempt. If a vendor asks for a sales tax exemption, make sure they provide you with a “resale certificate” or a valid reseller’s permit that validates this exemption for your records.
The goods and services that are exempt from sales taxes vary from state to state. This general list should not be considered definitive, but rather a list of possible exemptions that your state may have.
The following things may be exempt in your state/city:
- Goods intended for resale
- Real property (land and buildings)
- Food, medicine, and some clothing
- Sales to the federal government
- Sales to non-profit, religious and educational organizations
- Items used in activities deemed in the public interest (for example, agriculture and pollution control)
Once again, check your state and city tax regulations to verify what goods and services are exempt from sales taxes.
How To Collect Sales Tax
In order to collect sales tax, you must first obtain a sales tax permit by registering with your state Department of Revenue (full list of state website’s here). This will require a Federal Employer ID Number, as well as additional information about your business and its owners. You should be able to register online in most states.
Once you have obtained your state sales tax permit, you can begin accepting sales taxes on qualifying goods and services. When you make a sale, it is important that you show the tax amount separately on the receipt, so the customer can clearly identify the amount of the tax. Most modern cash registers and online shopping carts will allow you to program the sales tax rate for your state, and automatically itemize it on the receipt. Of course, it is always possible to manually calculate the sales tax for each sale as well.
How To Pay Sales Taxes
You should track all sales taxes, and keep them in your liabilities account on your balance sheet. Make sure to track the due dates for your sales taxes, as they will vary from state to state. In most cases, sales taxes must be reported on a monthly or quarterly basis. Most states now allow you to pay sales taxes online, which is very convenient. You can find detailed information on how, when and where to file your state sales tax here. To find out if your city has a sales tax and where to file search google for “your city + sales tax”.
That’s our article for today. If you have any questions or comments please leave them in the comments section below.
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